Making the best of a crisis

Azerbaijan and the International Bank of Azerbaijan set the example

Dr Jahangir F. Hajiyev Chairman of the Board, International Bank of Azerbaijan

Just prior to the Davos Annual Meeting, Swiss Style met with Dr Jahangir Hajiyev, Chairman of the Board of the International Bank of Azerbaijan (IBA), to discuss how the country – and specifically the bank – have fared during the last year in the light of the global financial crisis.

Interestingly, the conclusion is quite well, which is indicative of the government’s, and the bank’s, far-sighted approach to the value of prudent economic policies and innovative Central Bank strategies to maintain liquidity, resulting in a minimization and mitigation of risks for the business community and allowed the country to maintain one of the world’s highest growth rates in GDP.

Swiss Style: Dr Hajiyev, in the year since we last met, Azerbaijan has caught global attention on a staggering new scale.

The economy of Azerbaijan has grown 100% in a few years with among the fastest GDP growth rates in the world. From your standpoint as Chairman of the largest financial group in the southern Caucasus, how has the country fared during the recent crisis?

Jahangir Hajiyev: Ironically, Azerbaijan proved itself during the most difficult of “stress tests” of regional and global economic systems. Economic activity slowed but we fared relatively well. Azerbaijan has managed steady GDP growth, while most markets flat-lined or faced steep decline. In perspective, nominal GDP jumped from US$ 8.7 billion in 2004 to 47 billion in 2008, and 29 billion in 2009. In the CIS, we continued a 6% growth rate while close neighbours declined 3 to 16% in a year.
Azerbaijan’s number one export is oil with 13 billion barrels proven reserves and 2 trillion cubic meters of gas reserves. With the newly constructed BTC (Baku-Tblisi-Ceyhan) oil pipeline and the BTE (Baku-Tbilisi-Erzurum) gas pipeline, and others planned, Azerbaijan has become an important energy exporter.

Our President, Ilham Aliyev, deserves objective credit for his unfailing support to adopt prudential economic policies and innovative Central Bank strategies for maintaining liquidity in the financial system to minimize and mitigate risks. The IMF has been supportive in valorizing these quiet policies while offering cross-references and systems checks.

It is as important how one moves into a crisis as well as moves out. IBA was able to pay down nearly half the sovereign debt, of US$ 2.5 billion, at the peak of the crisis without outside help, and to honour commitments and syndicated loan repayments to foreign banks. Baku is happy to begin a new year. We are proud to have weathered the storm as a positive contributor to regional stability and economic recovery.

SS: What strategies have you and your institution adopted that have ensured economic stability during the crisis and that will allow for a resumption of Azeri growth, sustainable development and macroeconomic stability?

JH: We are reaping the benefit of a half decade of concerted economic diversification policies mandated by the President. While 54.4% of GDP comes from the non-oil sector, 45.6% now comes solidly from non-oil sector activities and makes our small country more stable and independent. Earlier investments are spawning new industries in agriculture, petrochemicals, renewable energy, recycling, manufacturing and other sectors that make sense for domestic and regional markets.

IBA had already begun large-scale restructuring to continue making all banking and business operations more transparent, efficient and productive. While we are reaping the benefits of a decade of large-scale sector turnaround investments and interventions, such as in sustainable agriculture, we are moving full force into renewable energy with small wind turbines and looking into carbon trading and other industry practices that are transformative. We are bringing new global patents from the US and the Gulf and technologies for soil remediation of coastal areas polluted by 163 years of oil drilling.

We are making new allies in sustainable development practices, which mesh well with Azeri culture, its agricultural roots and reverence for nature.

President of Azerbaijan Ilham Aliyev and British Prime Minister Gordon Brown meeting at 10 Downing Street in London on 13 July 2009 when the two countries signed a joint commercial business agreement

IBA has been fortunate to be invited into a dialogue with the new “Carbon War Room” launched by Sir Richard Branson, former President of Costa Rica Jose Maria Figueres and an exciting network of financiers and experts determined to transform global industry practices sector by sector to climate change compliant, profitable and innovative business practices. IBA has been studying through MASDAR in Abu Dhabi and business ties in Qatar how to accelerate green-tech and clean-tech investing. With 2010 designated by the President the “Year of the Environment”, the business sector, government and State Oil Company of Azerbaijan (SOCAR), have focused on sustainable business practices.

SS: IBA is the giant of the banking sector both in terms of scale, domestic and international franchise, and in technology and infrastructure. What is your stature in the banking sector?

JH: IBA is the largest and most established bank by far in Azerbaijan and contributes significantly to the stability of the banking system. IBA represents 40 to 50% of the banking market in Azerbaijan. We are 50.2% state-owned by the Ministry of Finance. As the National Development bank, IBA investments involve structured initiatives for economic diversification.
The banking sector includes 46 banks, of which nine have international operations. IBA is the only state bank and has an intensive national franchise of 37 offices, 39 sub-branches, a national penetration with points of service in cities and provincial city centres. IBA also has eight international offices and two stand-alone bank subsidiaries in Russia and in Georgia. In Azerbaijan, of the top ten Azeri banks, IBA holds 44.2% of assets, 47.6% of loans, 15.7% of retail loans, 39.4% of deposits, 30.5% of capital and 44.3% of banking sector profits. IBA has strong government support in capitalization and is an integral part of the banking system intermediating in a significant part of total business in the country.

IBA has been involved with major infrastructure financing projects for the government. A franchise of representative offices in Europe, the US, the Middle East and soon Asia maintains global and institutional banking relationships. IBA has Moody’s Ba2 rating with stable outlook and Fitch’s long-term rating of BB+, parallel to Azerbaijan’s sovereign rating.

SS: You were recently awarded the Queen Victoria Commemorative Medal in London for the implementation of successful economic and social programmes and for another award for the “Best Bank in a Crisis” by a group in Oxford. What do you think were the determining factors that led to such an important distinction?

JH: I was honoured to receive the Queen Victoria Medal. The Best Banker in a Crisis award also meant a great deal after working through the crisis to maintain economic momentum and analysing the impact of the crash and predicting future changes in global financial systems during such a nascent phase for Azerbaijan’s economy. Not long after the crisis hit in 2008, IBA was hosting CIS Central Bank governors and bank presidents in an annual meeting of the CIS Finance and Banking Council, on which I serve as Vice President.
Baku has been designated the second financial centre after Moscow and we will host these important discussions annually. I am happy that IBA could be honoured. Our team has worked hard.

One of the other high points of the year was the launch in London of the Britain Azerbaijan Business Council to forge greater understanding between London and Baku senior level business communities. This followed the visit of our President with Prime Minister Gordon Brown and high level business delegations to Baku.

SS: Dr Hajiyev, your family heralds partly from the famous Silk Route city, Sheki, which UNESCO has described as a virtual Camelot preserved with culture and castles in tact, and a required stop on the Silk Route. How did this old culture influence your vision as a global banker supporting the integration, or re-integration, of Azerbaijan with Europe and the world?

JH: Sheki is a beautiful place and is becoming more accessible through new airports and highway infrastructure reconnecting commerce to the region. The history is broad and Eastern-looking, at the foothills of the Caucasus’ mountains. Sheki taught me to be circumspect from a young age and to seek answers from many sources and references. In the Caucasus and Central Asia, from Georgia to Kazakhstan, Kyrgyzstan and Tajikistan, we share a classical legacy. The ancient Greeks referred to the Caucasus as the mountains where Olympus chained Prometheus and to Georgia as the home of the Golden Fleece. Through the centuries, bankers were pillars of public order. Royal treasuries spent money. Bankers had to safeguard funds through various mechanisms from capricious and arbitrary use. These mechanisms evolved and are still evolving to safeguard and encourage the free flow of capital.

SS: IBA was the first World Economic Forum-designated Global Growth Companies (GGC) from the Caucasus and extended Caspian region. From your experience of actively participating at many World Economic Forum venues over the years, what are the highlights of your experiences there?

JH: We are deeply grateful to the World Economic Forum for the intellectual capital they put at the disposition of our region. It has truly made a difference. Our leadership has enjoyed participating in Davos for many years. With GGC, the key is to make the Forum vision and expertise better felt in our extended region. IBA has benefited from summits in China, Korea, the Middle East, Turkey and many other venues. During the 2007 GGC launch summit in Dalian, China, in 2007, in twenty minutes, the IBA website received 3,000 hits and an outpouring of messages in Baku thanking us “for presenting Azerbaijan to China”. In Jordan, last year, we learned that Azeri guards have served the royal family, like Swiss guards to the Vatican as a tradition. The Forum is both a porthole and a privileged citadel to the world.